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Economy and Interest Rates 31st Meeting of CEO’s of HFCs Presentation by Mr. Keki Mistry Vice Chairman & CEO – HDFC February 18, 2011 1 GDP registering consistent growth • • • Quarter GDP Growth (%) Jul-Sep ‘08 7.70 Oct-Dec‘08 5.80 Jan-Mar ‘09 5.80 Apr-Jun ‘09 6.10 Jul-Sep‘09 7.90 Sep-Dec ‘09 6.00 Jan-Mar ‘10 8.60 Apr-Jun’10 8.80 Jul-Sep’10 8.90 Quarter Ended Sep 10- GDP growth at an impressive 8.90% (highest in any quarter in the last 3 years)-driven mainly by farm and services sector Manufacturing growth slowed down - expected to slow down further GDP expected to grow at about 8.6% during the FY 2010-11 2 RBI Monetary Policy Review – January 25, 2011 • Liquidity and Inflation are RBI’s primary concerns • Key actions in Monetary Policy on Jan 25, 2011 Reverse Repo & Repo increased by 25 bps to 5.50% & 6.50% CRR retained at 6.00% Temporary reduction of SLR from 24% to 23% of NDTL extended till April 8, 2011 • March 2011 Inflation target revised from 5.5% to 7% • Stance of the policy Contain the spill-over of rise in food and fuel prices to general inflation Rein in inflationary expectations Moderate enough so as to not disrupt growth Provide comfort on liquidity management • Credit growth at 24% against projection of 20% - growth is broad based across sectors and not just infrastructure. Housing including PSL growth was at 13.2% • Current Account Deficit at 3.7% of GDP a cause of concern 3 Tight Liquidity conditions persist LAF (Amt in INR Bn) 2,000 1,500 1,000 500 0 -500 -1,000 Repo -1004 -1,500 -2,000 Source: Reuters • Liquidity shortfall of around Rs 60000-90,000 cr in the system; peak shortage of Rs 1,70,485 cr on Dec 22, 2010. • Liquidity expected to tighten further in March 11-High level of bank CDs maturing in March 11 4 Projection of system liquidity 1 Week ending 1-Oct-10 8-Oct-10 15-Oct-10 22-Oct-10 29-Oct-10 5-Nov-10 12-Nov-10 19-Nov-10 26-Nov-10 3-Dec-10 10-Dec-10 17-Dec-10 24-Dec-10 31-Dec-10 7-Jan-11 14-Jan-11 21-Jan-11 28-Jan-11 4-Feb-11 11-Feb-11 18-Feb-11 25-Feb-11 4-Mar-11 11-Mar-11 18-Mar-11 25-Mar-11 1-Apr-11 + indicates money market liquidity will improve -- all amounts in INR 000 crores 2 3 4 5 6 Change in Net Gov Net discretionary Issuance of Othes incl currency in Borrowings (Net of govt spending sterilization Tax circulation redemptions and (includes tax) securities/ Payments/3G coupon payments) OMO /IPO 7 (13) (12) 2 3 (24) (11) (0) 8 (2) (9) (1) 3 4 (9) (10) (0) 2 (5) (3) (1) 0 (7) (8) (2) 1 3 (12) (14) (16) (5) (21) 6 (11) (5) (7) 1 (11) (3) (2) (6) 17 (9) (13) (11) 9 (9) (9) 18 4 4 (7) (1) (7) 17 15 12 4 11 33 3 2 8 24 2 7 1 17 28 10 11 9 31 1 7 2 30 5 5 18 40 13 2 3 4 20 8 12 12 8 (9) - (11) (15) (13) (8) (21) (56) (14) (16) (12) (49) - 7 System Liquidity (+ = surplus) -27 -50 -66 -66 -72 -73 -101 -104 -99 -76 -115 -148 -139 -112 -79 -81 -93 -92 -57 -85 -88 -67 -39 -50 -103 -85 -49 * Grey indicates projected liquidity Projected average shortfall till March 2011 : approx Rs 62,000 cr Projected govt spending from now till March 2011 : approx Rs 108,000 cr Source: J P Morgan Chase Bank 5 Systemic Liquidity Shortage • High cash surplus lying with govt after 3G/BWA outflows-Currently at Rs.114290 crores • Increase in currency in circulation - 3.4% higher than PY • Higher government spending in rural areas – (NREGA USD 9bn) • High Credit Deposit Ratios causing a drain on banking system liquidity • Currency with public at INR 888,120 crs (as on 28/01/2011) against Rs 768,033 crs (as on 31/03/2010) 25 20 19.7 15 10 5 2009-10 2010-11 0 6 Source: RBI Deposit Growth trailing Credit Demand Bank Dep Growth y-o-y% Bank Credit Growth y-o-y% 30 25 Y-o-Y %: 16.7% 23.2 20 15.9 15 10 Y-o-Y%: 17.0% 5 0 • • • Has added to liquidity pressures RBI in its recent credit policy, reiterated that rapid credit growth without commensurate increase in deposits not sustainable Approx 4 % credit growth is on account of credit offtake for 3G/BWA auctions Source: RBI 7 Inflation remains worrisome • • • WPI eased to 8.23% in January 2011 (8.43% in December 2010) Food Inflation eased to a 7-week low of 13.07% for the week ended 29th Jan 2011 (17.05% in the previous week) RBI’s inflation projection increased to 7% (from 5.5%) by March 2011 12 10 8 8.23 6 4 2 0 -2 Source: Bloomberg 8 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Inflation : Food Vs Manufacturing 25.0 20.0 15.0 15.6 10.0 8.2 3.8 0.0 Inflation (WPI ) 5.0 Food Inflation Mfg Inflation -5.0 9 IIP growth continues to be volatile IIP (%) 20 18 16 14 12 10 8 6 4 2 1.6 0 • • • IIP at a low of 1.6% in Dec 10 (down from 3.6% in Nov & 11.3% in Oct) High base effect coupled with contraction in mining and capital goods sector IIP numbers to remain volatile Source: Bloomberg 10 Rupee in the range of 45-48 Factors supporting a strong Rupee • • • Robust domestic growth Favourable Interest Rate differentials Easy global liquidity augurs well for FII inflows Risks • • • • Widening Current Account Deficit 3.7% of GDP in H1 of FY 11 (as against 2.2% in PY H1) Higher Oil Prices FDI flows slowing down , FII flows volatile and vulnerable to external factors Global Event risk – euro-zone sovereign crisis In the short term, INR is highly correlated to movements in the equity market indices 11 FII & FDI flows in India Net FII flows (Equity & Debt) and FDI flows (USD bn) 35 33 29 30 27 25 20 19 18 FII - Equity 19 17 15 FII - Debt 11 11 10 8 10 FDI Inflow 4 5 1 3 2 2 1 0 0 -5 -1 -1 -10 -12 -15 2005 2006 2007 2008 2009 2010 2011-Till Date • Total FDI /FII flows of USD 58 bn in 2010 –all time high •Net accretion in Fx Reserves Jan 10 till date : USD 13.81 bn Source – SEBI website/ Min of Com website 12 Interest Rate Outlook • Rate hikes of 150 bps in repo and 200 bps in reverse repo by RBI in FY 11 till date - another hike possible in March 2011 • Tight liquidity conditions - Call rates average 6.62% since Jan 2011 • Most banks have hiked their Base Rates thrice since July 2010. Overall increase by 125 bps - 150ps. Most Base Rates in the range of 9%-9.5% • Similar increases in the PLRs of banks • Short end rates continue to increase, yield curve has inverted • Higher inflation can lead to future rate hikes Domestic and Global food prices Global commodity prices Demand side pressures – wage inflation 13 CHANGES IN BASE RATE TILL DATE Name of the Bank Base Rate as on 1-Jul-10 Base Rate as on 14-Feb-11 Change Since 1-Jul-10 Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank IndusInd Bank Ltd. Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank South Indian Bank Ltd State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Travancore Syndicate Bank The Federal Bank Ltd. UCO Bank Union Bank of India United Bank of India Vijaya Bank Yes Bank Ltd 8.00% 8.25% 8.00% 8.00% 8.25% 8.00% 8.00% 7.75% 8.25% 8.00% 8.25% 7.00% 8.00% 8.20% 8.00% 8.10% 7.75% 7.75% 7.75% 8.25% 7.75% 8.00% 8.00% 8.25% 8.25% 7.00% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.40% 9.45% 9.50% 9.50% 8.25% 9.50% 9.50% 9.50% 8.80% 8.50% 8.50% 8.50% 9.50% 8.50% 9.50% 9.50% 9.45% 9.50% 8.00% 1.50% 1.25% 1.50% 1.50% 1.25% 1.50% 1.50% 1.65% 1.20% 1.50% 1.25% 1.25% 1.50% 1.30% 1.50% 0.70% 0.75% 0.75% 0.75% 1.25% 0.75% 1.50% 1.50% 1.20% 1.25% 1.00% 1.25% Axis Bank Ltd. HDFC Bank Limited ICICI Bank Ltd. State Bank of India 7.50% 7.25% 7.50% 7.50% 8.25% 7.75% 8.25% 8.25% 0.75% 0.50% 14 0.75% 0.75% CHANGES IN BPLR TILL DATE Name of the Bank BPLR as on 1-Apr-10 BPLR as on 14-Feb-11 Change Since 1-Apr-10 Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank IndusInd Bank Ltd. Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Yes Bank Ltd 12.00% 12.00% 12.00% 12.00% 12.25% 12.00% 12.00% 12.00% 12.50% 12.00% 12.25% 17.00% 12.00% 13.50% 11.00% 12.25% 12.25% 12.50% 12.00% 12.25% 11.75% 12.00% 12.00% 16.50% 13.50% 13.75% 13.75% 13.75% 13.50% 13.75% 13.75% 13.60% 14.50% 13.50% 13.75% 18.25% 13.75% 14.25% 13.00% 13.50% 13.50% 13.50% 13.75% 13.75% 13.75% 13.50% 13.50% 18.00% 1.50% 1.75% 1.75% 1.75% 1.25% 1.75% 1.75% 1.60% 2.00% 1.50% 1.50% 1.25% 1.75% 0.75% 2.00% 1.25% 1.25% 1.00% 1.75% 1.50% 2.00% 1.50% 1.50% 1.50% 1.55% Axis Bank Ltd. HDFC Bank Limited ICICI Bank Ltd. State Bank of India 15.00% 16.00% 15.75% 12.25% 15.75% 16.50% 17.00% 13.00% 0.75% 0.50% 1.25% 150.75% Movement in cost of funds Rates as on April 1, 2010 Current Rates Commercial Papers 6 Months 1 Year Increase 6.00% 6.60% 10.40% 10.65% 4.40% 4.05% Non Convertible Debentures 1 Year 6.25% 5 Years 8.70% 10 years 9.00% 10.00% 9.75% 9.50% 3.75% 1.05% 0.50% * Typical for a AAA borrower 16 Movement in AAA borrowing rates Commercial Paper (CP) Source: Reuters 17 Movement in AAA borrowing rates Term Borrowings (NCD) Owing to sharp increase in short term rates, interest rate curve has inverted Source: Reuters 18 Movement in G-Sec Rates 8.5 8.182 8 7.953 8.147 10yr G-Sec 7.5 7.343 7.482 7 6.5 5 yr G-Sec 6 5.5 5.122 5 1 yr G-Sec 4.5 4 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Source : Reuters 19 Implications for HFCs • Bank loans are a key source of funding for HFCs. Frequent changes in Base Rates by banks makes the funding cost volatile. • Since the implementation of Base Rates w.e.f. July 1, 2010, the cost of bank funding has gone up by 3%-3.5% • Special dispensation of home loans upto Rs 20 lacs qualifying as priority sector for refinance from banks has come to an end on March 31, 2010 . Current limit : Rs 5 lacs for indirect finance • Banks have been raising deposit rates since December 2010 , translating into higher cost of deposits for HFCs • Need to look at alternate sources of funding for HFCs 20 Some suggestions – NHB may look at providing a short term liquidity facility to HFCs against their loan assets and investments – Housing loans qualifying as Priority Sector under indirect finance from banks be increased to Rs. 20 lacs from the current limit of Rs. 5 lacs – Tax Saving Bonds : Housing may be accorded ‘infrastructure’ status to facilitate issue of tax savings bonds Priority Sector bonds : Revised RBI guidelines require banks to lend priority sector loans co-terminus with the underlying home loans. Banks find it difficult to lend for longer term due to ALM risks. Issue of priority sector bonds by HFC’s will help the banks to generate liquidity and also address ALM issues – ……..contd 21 Some suggestions Public deposits – – Currently, HFCs can offer a maximum period of 84 months on public deposits This limit may be revised to 10 years in order to enable HFCs to attract funds from institutional investors such as provident/pension funds, Army/air force group insurance which invests in longer durations External Commercial Borrowings – – – Infrastructure companies can now access ECBs HFCs be allowed to access ECBs as it will open up a new source of funding Can be approved on a fully hedged basis, so that HFCs are not open to forex fluctuation risk Perpetual debt – HFCs be permitted to raise upto 15% Tier I capital by way of perpetual debt 22 Thank you 23